Fintech firms racing to expand and bundle consumer financial technology offerings spurred M&A in 2021, and the momentum will continue into 2022.
Many emerging consumer fintech companies have spent the first few years in their lifecycle building a focused product in digital banking, retail trading or installment loans such as buy now, pay later. In 2021, large players did not shy away from paying up for those who have established niche products and a customer base, evidenced by Block Inc.'s $27.01 billion pending acquisition of Afterpay Ltd., PayPal Holdings Inc.'s $2.73 billion acquisition of Paidy Inc. and Goldman Sachs Group Inc.'s $2.24 billion pending acquisition of GreenSky Inc.
But consumer fintechs are becoming strategic buyers themselves. Some notable deals include digital lender Oportun Financial Corp.'s $211.1 million acquisition of banking application Hello Digit Inc. and neobank MoneyLion Inc.'s $440 million pending acquisition of fintech API builder Even Financial Inc. The moves are driven by their demand to tackle broader financial needs instead of focusing on a single product to retain customers, with many touting a "super app" approach and aiming to be a portal of various digital financial services.
"There is recognition that consumers don't necessarily want to have six or seven apps on their phone and have to manage all those things separately," Raul Vazquez, CEO of Oportun, said in an interview. "This suite bundling is one of the biggest drivers in fintech M&A, both this year and will be in the coming years."
Going forward, fintechs' access to capital will continue to bolster their ability to pursue deals. Not only did U.S. fintech funding remain robust through 2021, but so was initial public offering activity as 12 venture capital-backed U.S. fintech companies went public from January to November 2021 matching the total from 2016 to 2020 combined, according to a report by Silicon Valley Bank. The recently listed fintech companies, such as Oportun, MoneyLion, nCino Inc., Coinbase Global Inc. and Bill.com Holdings Inc., have become a new cohort of buyers using M&A to fulfill their strategic goals.
"In our own portfolio, the amount of acquisition interest from recently public fintechs is really significant," said Abdul Abdirahman, a senior associate at venture capital fund F-Prime Capital. "We're just beginning to see it rise."
Bundling consumer fintech
Bundling more adjacent products into one application can help expand fintech companies' total addressable market and lower their customer acquisition costs with cross-selling opportunities. Emerging fintech companies often have to demonstrate fast growth to back the valuation offered by investors in the private and public markets. However, operating without bank charters could limit their product offerings and geographical coverage, and the costly marketing expense for a single product is believed to make it challenging for fintechs to generate a profit.
Despite being fully chartered, digital banking company Varo Bank has accumulated $304 million in noninterest expense to attract $260 million in deposits over the last five quarters, Sam Haskell, chief investment officer at Colarion Partners wrote in a newsletter Dec. 15. In comparison, a one-branch bank Haskell advises spent $7.3 million in advertising to attract much of its $357 million deposit balance in the same time period, Haskell wrote. The bank is also able to deploy the deposits in loans and generates profits, he noted.
"That sort of one-trick-pony or the solving-one-use-case is great to acquire people, but to keep them I think you need to keep adding things to it," said Rutger van Faassen, head of product and market strategy at financial data and consulting firm Curinos. "Then they also realize you can't really build everything. Sometimes it's smarter to just partner or acquire."
What attracted Oportun to acquire Digit — the marketing name for Hello Digit — is the opportunity to leapfrog into multiple digital banking arenas, Vazquez said. While Oportun's core offerings are personal loans and credit cards, Digit provides users with insights and guidance on savings, investing and banking. It is aligned with Oportun's commitment to becoming a bank, the CEO added.
In October, Oportun announced it had voluntarily withdrew its bank charter application with the Office of the Comptroller of the Currency, and Vazquez said this was because Oportun was in the final stages of the Digit deal. The acquisition, in addition to its expansion into more states in 2021, would significantly change Oportun's business plan and the charter application it originally submitted in 2020. Oportun still wants to become a bank in the future, potentially through re-submitting the de novo application or acquiring a chartered bank, Vazquez said.
Access to capital driving M&A
The recent IPO rush allows more fintechs to leverage public equity as part of the currency to make acquisitions. In its acquisition of Digit, Oportun used approximately $98.5 million in stock and $112.6 million in cash. Since the public market has been receptive to many fintech companies and holds up their high valuations, it gives the fintechs a financial incentive to use their higher multiple stock to acquire a target at a lower multiple, F-Prime Capital's Abdirahman said.
The liquidity driving fintech investments in 2021 has been strong via various sources, including the capital from corporate buyers, private equity buyers, the traditional IPO market and special purpose acquisition companies, said Dan Allred, a senior market manager for Silicon Valley Bank. Financial business process software, payments, personal finance, and blockchain and cryptocurrency are among the top niches drawing M&A by deal volume, according to the report by Silicon Valley Bank.
Private equity buyers pursued five of the 20 largest fintech deals in 2021, including the $5.86 billion acquisition of CoreLogic Inc. by Stone Point Capital LLC and Insight Venture Management LLC, the $3.75 billion acquisition of Calypso Technology Inc. and the $2.57 billion pending acquisition of Bottomline Technologies Inc. by Thoma Bravo LP.
"We see private equity investors getting into the space in a way that they haven't before, because they recognize the size of these markets and the types of companies that can be created," Allred said in an interview.
